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Managing your super self

Thousands of Australian investors have control of their super funds and are using them to invest in property.

According to figures from the Australian Taxation Office, as at June 2015 Australia had 556,998 Self Managed Super Funds (SMSF’s) with over one million members.

SMSF’s are established by one to four people for the sole purpose of providing retirement benefits. The key point of difference between a SMSF and a retail, corporate or industry super fund is the ability for the member to have some control over the assets invested at arms length.

In the context of property investment with a SMSF, a residential or commercial property can be purchased. Some rules do apply to such purchases, specifically the property must:

  • Meet the “sole purpose test” of solely providing retirement benefits to fund members.

  • Not be acquired from a related party of a member.

  • Must not be lived in by a fund member or any fund members related parties.

  • Must not be rented by a fund member or any fund members related parties.

Basically, the property cannot be the residence of a fund member or used as a holiday home and is solely purchased for investment purposes.

In the event that a SMSF purchases a commercial property, a member can pay market rent to the fund for their business to operate from the premises. You can also transfer commercial property that you already own into a SMSF. This may allow you to unlock cash or invest in your business or other assets.

When it comes to purchasing property with your SMSF the following conditions and benefits exist:

  1. Post retirement: you will pay no tax on the capital gain if you sell or on the rent if you continue to own it.

  2. Pre-retirement: rent is taxed at 15 per cent, rather than rates of up to 47 per cent.

  3. Property held by a SMSF are protected against general debt recovery and bankruptcy proceedings (this does not apply to the loan with which the property was purchased).

  4. Depreciation, along with other expenses such as interest, rates and maintenance fees are claimable within a SMSF.

  5. Renovating a property purchased through a SMSF is not allowed whilst there is money borrowed against it.

  6. Buying property with a SMSF could have an impact on your personal portfolio if you are required to contribute more money to cover expenses. It is important to select a property that matches your SMSF capacity for income and expenses

Further to point four the costs incurred in purchasing and managing a property, such as interest and depreciation, may produce a “negative” income that you can offset against other income to further reduce your tax income. The following scenario for a two bedroom apartment purchased for $620,000 highlights this point.

In this example the property is rented for $650 per week, resulting in a total income of $33,800 per annum. Expenses for the property including interest, management fees and holding costs totalled $41,724. Therefore the SMSF had a tax deductable loss for this property of $7,924 prior to lodging a tax assessment.

Without claiming depreciation, the SMSF is able to claim $7,924 and reduce the fund’s tax liability by just $1,189, resulting in a negative cash position of -$130 per week. By claiming $15,500 in depreciation, the total deductible loss is increased to $23,424. By claiming the tax rate of 15 per cent on the total deductible loss of $23,424, the SMSF’s tax liability will be reduced by $3,514, thereby adding $2,325 to the retirement fund in the first year.

SMSF’s offer members many benefits. While investing in property is one opportunity that will suit some, it is best to obtain advice from qualified professionals on your individual scenario. BMT Tax Depreciation is experienced in providing tax depreciation schedules for SMSF’s on behalf of their members.


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